you had the unsecured bondholders. The mezzanine second lien
market is nowhere near as robust as it used to be. There is probably more bond debt still than second lien facilities. With first
lien, I think banks are being more conservative with respect to
financial covenants, pricing and collateral coverage. Haynes and
Boone recently published our borrowing base survey. The survey
confirmed that people expected this fall borrowing bases may
go up or down about 10%, but that’s going to be it for the most
part. I think that’s reflective of the fact that the market has
adjusted.

OGFJ: Do you see a change happening with regard to re-serve-based loans? We ran an article recently about loan values
that weren’t reduced in 2015, 2016, or 2017 despite a 75%
contraction in oil prices from 2014 to 2016. Are we witnessing
an evolution in the financing?

Clark: You’ll never get a bank to put in black and white its borrowing base formula because there’s a little bit of art with the
science. It’s not a linear equation of 75% of PDP plus 20% of PUD
value. There are other variables
that go into a bank’s calculation
of how much it is comfortable
lending to any given producer.

The formula is a black box and
it enables the banks flexibility in
either direction, but, more often
than not, the banks are going to
stretch rather than contract.

I think the study you are referring to reflects the reality that
banks faced in 2015-2016. Prices contracted severely, but borrowing bases did not follow in lock-step. Reducing a company’s
borrowing base below its outstanding borrowings triggers a repayment of principal. In a low price environment, that can be a
death spiral. The more cash a producer uses to repay its bankers,
the less it can reinvest in its properties to maintain cash flows,
the lower the borrowing base, etc. So unless the bankers wanted
to force their borrower into a fire sale or bankruptcy, they were
slow to reduce borrowing bases below outstanding
borrowings.

As prices recover and producers regain their financial health,
I predict you will see more ‘conforming’ borrowing base determinations. I think we are already seeing that with the fall 2017
redeterminations.

OGFJ: Will West Texas continue as the news-maker in 2018?

Clark: There’s so much momentum there. Everybody has acquired
this acreage that they’re going to need to drill, produce, and build
out infrastructure and pipelines. I think the Permian is an incredible story. If you read the history of the industry, while it didn’t
exactly begin there, the Permian is where a lot of the big oil
companies got their start. It’s part of the romance of this industry,

that the Permian is back. OPEC’s actions in late 2014 hurt them
more than the US producers. What they did was help drive more
inventions and technology that have driven a phenomenal increase in production. That’s the sprit that made our industry the
engine that has enabled the United States to dominate the world
in energy…and at the same time made it so interesting...the boom
and bust, and the characters and activity around the industry.

OGFJ: Haynes and Boone publishes a report on bankruptcies
in the sector. What does the recent report show in comparison
to the firm’s previous report?

Clark: Our most recent Bankruptcy Monitor Report is showing
that the wave of bankruptcies is subsiding. It’s still an incredible
number, around 133 total bankruptcies as of October 2017 for
producers now with a few more in the works. When we first
started tracking oil and gas bankruptcies in January 2015, I thought
150 would be the number we’d hit. I’d be glad to be wrong. The
larger bankruptcies early on, the blockbuster, billion dollar bank-ruptcies…I don’t think we will see too many more of those. Of
course, that’s not taking into
account oilfield services side. I
don’t know if we’ve seen the end
of oilfield services
bankruptcies.

One question folks ask is if
some of these companies will a
Bankruptcy for the individual company and its employees can
be very tragic, but for the industry as a whole it’s positive. There
are a number of zombie companies still out there. If they were
not still limping along, it would be better for the industry long-term. In Texas in the 1980s we had a lot of real estate companies
that couldn’t get anywhere and the whole real estate market
suffered for a decade. Texas had to get rid of all that raw land
inventory, but once you got rid of it, there was more activity. I
think it’s the same thing in the oil and gas industry. I don’t want
to say all zombie companies should go through bankruptcy, but
I think even those companies recognize there needs to be a
resolution. The sooner the resolution, the stonger the recovery.
But for any individual company that is still struggling, their
thought is ‘I don’t want to resolve it today, because I can get more
money if I wait.’ I think there are a number of companies that
aren’t doing anything with their assets because they can’t afford
to, but the assets, in the right hands, are valuable.

OGFJ: We’ve seen some oil and natural gas E&P companies

“Seventy percent of the activity in the industry
today is private equity driven. Ten years ago it
would have been considerably less, and 20 years
ago it would have been zero. I don’t know if it’s
a good transformation long-term or bad. Private
equity may like oil and gas today, but they may
not like it tomorrow.”